MUFG trade of the week: Staying long EUR/USD and long AUD/NZD

MUFG maintains a long EUR/USD position to its TOTW portfolio (spot ref: 1.0920), with a target at 1.1320, and a stop at 1.0620. MUFG also maintains a long AUD/NZD position targeting a move towards 1.1200, with a stop at 1.0700.

"We are maintaining a long EUR/USD trade idea. The pair retested the top of this year's trading range between 1.0500 and 1.1000, and we expect the pair to move closer to the year to date high from April at just below the 1.1100-level," MUFG notes.

"We are maintaining our long AUD/NZD trade idea to reflect expectations for narrowing policy divergence between the RBA and RBNZ," MUFG adds.

MUFG sees three reasons why sustained strength in the USD is unlikely.

1. Rebounding USD: The US dollar US Dollar The US dollar, (symbol $, code USD) is the fiat currency of the United States of America (USD) and the most widely traded currency globally. It was introduced into the US in the late 18th Century, with paper notes not being distributed until the following century. The US dollar, also informally known as the greenback, is the world’s most foremost reserve currency, due in large part to the importance of the US economy on the world stage. Once backed by gold (in the 1900’s), the USD is now a purel The US dollar, (symbol $, code USD) is the fiat currency of the United States of America (USD) and the most widely traded currency globally. It was introduced into the US in the late 18th Century, with paper notes not being distributed until the following century. The US dollar, also informally known as the greenback, is the world’s most foremost reserve currency, due in large part to the importance of the US economy on the world stage. Once backed by gold (in the 1900’s), the USD is now a purel Read this Term has rebounded and has been stronger against most G10 currencies Currencies Currencies are a typically a form of money in wide circulation, being the primary medium of exchange with respect to buying and selling goods and services. These are often issued by a specific government or collection of governments, by way of paper notes and coins. Other forms of currencies include previous metals such as gold and silver, and digital currencies such as Bitcoin. Currencies serve as a backbone of the country’s or countries’ economy, due to the perception of value held by the popu Currencies are a typically a form of money in wide circulation, being the primary medium of exchange with respect to buying and selling goods and services. These are often issued by a specific government or collection of governments, by way of paper notes and coins. Other forms of currencies include previous metals such as gold and silver, and digital currencies such as Bitcoin. Currencies serve as a backbone of the country’s or countries’ economy, due to the perception of value held by the popu Read this Term over the week following a
   previous week of weakness. MUFG suggests that this pattern of alternating between strength and weakness could continue.
2. Tightening Cycles Uncertainty: The market has arrived at a stage in the tightening cycles where it's harder to determine how much further tightening is necessary. This means that both central banks and markets will become more sensitive to incoming economic data. For example, the sharp depreciation of the EUR today was due to weak PMI data.
3. Potential Weakening of USD: MUFG maintains that there is a likelihood that the Federal Open Market Committee (FOMC) will continue with its pause in tightening, and if this happens, it could weaken the US dollar. However, this assumes that there is no significant decline in growth outside of the US. In other words, if upcoming US economic data supports the notion of the FOMC extending its pause in tightening policy, gains in the US dollar could be reversed.

In summary, MUFG suggests that the US dollar's strength may not be sustained in the longer term due to the uncertainty surrounding tightening cycles and the sensitivity to economic data. They believe that if the FOMC continues to pause its tightening, and if the economic data supports this stance, it could result in a weakening of the US dollar.

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